If a debt goes unpaid for long enough, it can eventually end up with a collection agency. That’s when the aggressive phone calls and letters usually start. Hearing from a debt collector can feel stressful, overwhelming, and even scary. However, it doesn’t have to be. Understanding how debt collection agencies work — and what your rights are — can help you navigate a difficult situation with more confidence and less panic.
Below, we break down what collection agencies actually do, how they’re different from debt buyers, what steps you should take if you’re contacted, and how this process can affect your credit.
Table of Contents
Key Points
• Debt collection agencies recover unpaid debts for creditors, earning a percentage as fee.
• Debt buyers purchase and own delinquent debts and use similar recovery methods.
• If you’re contacted by a debt collector, verify the debt is valid and, if necessary, dispute the debt.
• Negotiate settlements or payment plans with collectors, considering your financial limits.
• Collections can negatively impact your credit file but paying them may improve future credit prospects.
How Does Debt Collection Work?
Debt collection is the process of pursuing payment on overdue debts. Having a “debt in collections” means the original creditor (such as a credit card company, an auto lender, or a utility) has sent the debt to a third-party person or agency to collect it.
Typically, a debt doesn’t go to collections if you miss one payment. If nonpayment goes on for a while (typically 90 to 180 days), however, the original creditor may decide to give up trying to collect from you and write the debt off as a loss. This process is known as a charge-off. At that point, they will usually do one of two things: assign the debt to a third-party debt collection agency or sell it to a debt buyer.
Once the debt is transferred or sold, the collection process intensifies. You may start receiving letters, phone calls, or emails from the debt collector. Their goal is to recover as much of the debt as possible, either in full, through a payment plan, or via a negotiated settlement.
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What Is a Debt Collector?
A debt collector is any individual or company whose primary job is to recover money owed on delinquent accounts. They might be part of a collection agency, a law firm specializing in collections, or an in-house department of the original creditor.
Under the Fair Debt Collection Practices Act, debt settlement companies are required to follow strict guidelines when contacting consumers. They are prohibited from using abusive, deceptive, or unfair practices. For example, they can’t call before 8 a.m. or after 9 p.m., harass you, or misrepresent themselves.
What Do Collection Agencies Do?
Collection agencies work on behalf of creditors to recover unpaid debts. Generally the way they make money is by receiving a percentage — usually between 25% and 50% — of the amount they recover. Commissions tend to be on the higher end of that range for older debts, since they are more difficult to collect.
Collection agencies can — and do — use a variety of tactics to recover funds, including:
• Calling you at home or work
• Sending letters, text, or emails
• Contacting you through social media
• Showing up at your front door
• Contacting your friends and family to confirm your contact information (they can’t do this more than once, however, or reveal why they need the information)
• Take you to court to recover a past-due debt
When dealing with collections, it’s important to keep in mind that there is a statute of limitations on debt. Collectors generally have between three to six years to file a lawsuit over old debts (the timeline varies by where you live and type of debt). The clock starts when your debt was first recorded delinquent. After the statute of limitations ends, a collection agency cannot legally sue you for the debt. They can, however, still hound you for the money.
How Is This Different from a Debt Buyer?
A debt buyer doesn’t work for the creditor like a debt collection agency does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. How much these collectors pay for debt varies but it can be as little as a few cents on the dollar.
Because debt collectors own the debt, they generally have more freedom to negotiate than collection agencies that are merely collecting on someone else’s behalf. Also because they often pay so little for debt, any recovery can represent a profit.
Like debt collection agencies, debt buyers sometimes use aggressive tactics to collect a debt. However, they are subject to the same state and federal laws designed to protect borrowers from harassment.
Recommended: Credit Card Debt Collection: What Is It and How Does It Work?
How to Deal With a Debt in Collections
Finding out that a debt is in collections can be alarming. However, taking deliberate, informed steps can help protect your finances and your rights.
Verify the Debt
Before paying anything, it’s important to always verify the debt. Debt collectors are required by law to send you a debt validation notice within five days of contacting you. This notice should include:
• The debt collector’s name and address
• The name of the creditor
• The amount owed
• What to do if you don’t think it’s your debt
• Your debt collection rights
If you’re unsure about the validity of the debt or the amount, send a written request for verification within 30 days. This forces the agency to provide documentation proving the debt is legitimate. If the debt is not valid, you can dispute it with the collector.
Negotiate a Payment Plan or Settlement
If the debt is legitimate, consider negotiating. Many collectors are willing to accept a lump-sum settlement for less than the full balance, especially if they purchased the debt cheaply. Alternatively, you might be able to arrange a payment plan that fits your budget.
When negotiating, be sure to consider your financial situation and avoid agreeing to any terms you can’t realistically meet. Once you sign off on a payment plan or make a payment on old debt, it restarts the clock on the statute of limitations.
Get Agreements in Writing
Before sending any money to a collection agency, make sure you have a written agreement that outlines the terms. This document should specify the amount to be paid, the payment schedule, and whether the agency will report the account as “paid in full” or “settled” to credit bureaus.
Getting agreements in writing protects you from future disputes and ensures you have proof of compliance.
How Does a Debt in Collections Affect Your Credit?
Missed payments on a debt already negatively impact your credit profile. When a debt goes into collections, the situation typically worsens.
When the original creditor decides to stop trying to collect on your debt and closes your account, the charge-off goes on your credit report. Once the debt goes to collections and the debt collector sends you a notice, the collector will create a new collection account, which also lands on your credit report.
Both the charge-off and the collection account are negative entries, and can cause an immediate drop in your credit scores of 50 to 100 points, possibly more.
While paying the debt collector will not remove the collection account from your credit report, it’s generally a good idea to do so. For one reason, some newer credit scoring models ignore collection accounts with a zero balance. Potential lenders also tend to view paid-off collection accounts more favorably when they check your credit report as part of a credit application. On top of that, you’ll no longer be harassed by the debt collection company.
Alternatives to Debt Collection Agencies
You can avoid having debt land in collections by taking steps to manage and pay down existing debt. Here are some strategies to consider.
Consumer Credit Counseling Services
Nonprofit credit counseling agencies offer free or low-cost services to help you gain better control of your finances. You can often get counseling, budgeting advice, and credit education from a certified counselor free of charge.
For an added fee, a counselor can also set up a debt management plan. This means they will negotiate with creditors on your behalf to lower your interest rates and fees and establish a payment plan that works for you. They then consolidate your payments into one monthly amount. You make a single payment to the counseling agency, which distributes the funds to your creditors.
Debt Settlement
If you’re more than 90 days past due on a debt and suffering financial hardship, you might consider debt settlement, also known as debt relief. This is a strategy where you negotiate with your creditors to lower your debt in return for one lump sum payment. You can try this yourself or hire a debt settlement company, though the latter often charges high fees and may not guarantee success.
Just keep in mind that settling a debt can negatively affect your credit file, since settled accounts stay on your credit report for up to seven years. However, for those overwhelmed by debt, it may be preferable to ongoing collections or bankruptcy.
Debt Consolidation
Debt consolidation involves combining multiple debts — typically high-interest debts like credit card balances — into a single loan or credit account. The main goal with this debt payoff strategy is to simplify repayment and potentially lower the interest rate or monthly payments. Some common ways to consolidate debt include:
• Debt consolidation loans: These are essentially personal loans that are used to pay off other debts and rates tend to be lower than credit cards.
• Balance transfer credit cards: These are credit cards that let you move balances from others cards; some offer a 0% introductory rate.
• Home equity loans or lines of credit: This involves borrowing against your home equity to pay off debts.
Before you consolidate debt, it’s important to look closely at rates and any added fees to make sure the move will be cost effective.
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Bankruptcy as a Last Resort
Personal bankruptcy is a legal process designed to provide relief for people facing severe financial difficulties who are unable to repay their debts. There are two main types for individuals:
• Chapter 7: This allows you to discharge most types of unsecured debt, such as credit card balances and medical bills, but you must first liquidate non-exempt assets to repay as much of the debt as possible.
• Chapter 13: This allows you to restructure your debt under a new repayment plan that usually spans three to five years.
Keep in mind that bankruptcy has serious long-term credit consequences. It stays on your credit report for seven to 10 years (seven for Chapter 13 and 10 for Chapter 7), making future borrowing more difficult.
The Takeaway
If you’ve gotten a phone call or letter from a debt collector, it’s important to understand how debt collection agencies work and how to handle debt in collections. Ignoring a collector won’t make the debt go away. Instead, it’s better to gather as much information as possible to make informed decisions.
If you’re struggling with multiple high-interest debts, keep in mind that there are options available to help regain control of your finances.
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FAQ
What rights do you have when dealing with a collection agency?
When dealing with a collection agency, you have rights under the Fair Debt Collection Practices Act. Collectors must treat you fairly and cannot harass, threaten, or lie to you. They must identify themselves, provide proof of the debt if requested, and cannot contact you at inconvenient times (such as before 8 a.m. or after 9 p.m.). You also have the right to request all communication in writing and to dispute the debt within 30 days of first contact.
Can a debt collector sue you or garnish wages?
Yes, a debt collector can sue you for unpaid debt. If they win the lawsuit, they may obtain a court judgment allowing wage garnishment. However, collectors must notify you and give you a chance to respond. State and federal laws also limit how much a creditor can garnish from your wages. Always respond to legal notices promptly, and consider speaking with an attorney or credit counselor if you’re being sued over a debt.
How do you remove a collection from your credit report?
To remove a collection from your credit report, start by checking if it’s accurate. If it’s incorrect or too old (over seven years), you can dispute it with the credit bureau. For valid collections you’ve paid, you might request a “goodwill deletion” after you’ve paid it. This involves calling or writing to the collection agency and asking to have the account deleted as a gesture of goodwill. They don’t have to comply, but they might.
Does paying off collections improve your credit score?
It might. Some credit scoring models consider accounts in collections, even if they are paid. However, newer FICO and VantageScore models ignore paid collections, which means paying them off can be beneficial. Regardless, settling or paying off collections looks better to lenders and can help you qualify for credit in the future. It also prevents further action, like lawsuits. Always ask for a written confirmation of payment or settlement.
What’s the difference between a debt collector and a debt buyer?
A debt collector is a company hired by a creditor to collect money on their behalf. They don’t own the debt but earn a fee or commission for collecting payment. A debt buyer, on the other hand, purchases delinquent debts from original creditors, often for pennies on the dollar, and then owns the debt outright. Your rights remain the same under both.
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